Good trade policies should be fair as well as efficient. Fairness in trade policies incentivizes people in the right direction and ultimately increases the efficiency of the economy by promoting productivity. Providing proper education regarding trade policies helps people to correctly understand the fairness of policies pursued by the government, thus eliciting support from the people. Building up social capital through inclusive trade policies that are grounded in both efficiency and fairness, together with diverse strategies to raise the public’s understanding of these inclusive policies, is the primary component of “good” trade policies contributing to our society’s integration and enhancing trust in the society.
   According to our survey of the Korean people’s perception on Korea’s trade policies, people believe that the fairness of trade policies can be achieved by supporting  small and medium enterprises (SMEs) at the firm level and by strengthening the social security system at the individual level. People tend to think that trade policies are unfair because these policies mostly benefit large companies. Although this kind of perception can be attributed to Korea’s past economic growth paths that had emphasized trickle-down effect, the fact that SMEs utilize FTAs to a lesser extent than large firms also reinforces this popular perception. However, it should be noted that the lower FTA　utilization rate by SMEs is more attributable to structural factors such as relatively high fixed costs for SMEs utilizing FTAs  rather than any intrinsic unfairness in trade policies per se. Therefore, we need to develop trade policies that one friendly to SMEs in order to improve the fairness of trade policies. Simultaneously we need to implement policies that help SMEs enlarge their capacity for utilizing FTAs and outcomes of trade policies. Further, in order to raise the level of fairness, an effective trade adjustment system should be set up for individuals who were hurt directly by trade policies.
   Thus, we suggest the policy recommendations in the structure of principles, goals, and tasks for inclusive trade policies as follows: <Figure>

   China’s overseas investment is expanding, led by M&As. According to the UNCTAD World Investment Report, Chinese overseas M&A has been growing rapidly compared to greenfield investment. In 2016, Chinese overseas M&A reached a record high of US$92.2 billion, a 60 fold increase from 2007. As a result of the expansion, China’s share of global cross-border M&As also expanded significantly, reaching 18.9% in 2017, making it the world’s leader in M&A execution.
   With the rapid expansion of China’s overseas M&As and shift in acquisition targets to companies with cutting-edge technology, high-end brands, and top-level market shares, regulations on Chinese companies’ M&As are tightening, especially in advanced economies such as the United States and European Union. In particular, the U.S. is keeping Chinese companies in check by mandating a stricter reviewing process by the Foreign Investment Review Committee (CFIUS) to stop high-tech leaks and national security threats.
   The overseas M&As of Chinese companies are facing a new phase in the wake of internal and external obstacles and Belt & Road initiatives of China. As of 2017, overseas M&As of Chinese companies showed a significant decrease in size overall, but M&As to Belt & Road countries showed an increasing trend. However, major M&A industrial sectors showed different patterns in different countries. In Kazakhstan, in particular, all of China’s M&As have taken place in the energy sector. On the other hand, M&A projects conducted in Israel were led by the high-tech sector. Meanwhile, in Singapore, where China has executed the most M&As among all Belt & Road countries, it was clear that the M&As had been executed in more diverse industrial sectors than Kazakhstan or Israel, spread across industrial goods, finance, real estate, consumer goods, etc.
   If we look at the characteristics of Chinese companies’ M&As through a case analysis of Chinese companies, first of all, it can be seen that Chinese companies’ overseas M&As have been affected by the Chinese economy’s overall level of development and China’s foreign investment policy based on Chinese national strategies. In addition, while most global M&As are based on commercial incentives of companies, there are quite a few cases of M&As in China that are based on strategic motivations rather than the commercial motives of companies, and it likely that there will be more M&As in line with China’s Belt & Road initiative and China Made 2025.
   In recent years, China’s foreign investment policy has reached a turning point. China has imposed restrictions on foreign investment in sensitive industries such as real estate and hotels since the end of 2016, while the 19th Party Congress held in October 2017 aggressively promoted overseas expansion of Chinese companies in pursuit of the Belt & Road project. In particular, China emphasized innovation in the field of overseas investment and established a network of global trade, investment, production and services. In addition, the 13th National People’s Congress, China’s largest annual political event held in March 2018, announced plans to: promote stable development of foreign investments; construct Trade Cooperation Zones; and promote the convenient use of RMBs in global trade and investment. Therefore, China’s overseas investment will be focused on Belt & Road projects, aimed at establishing a global production network and building overseas economic and trade cooperation zones.
   As a target for Chinese companies’ overseas investment expansion Korea remains but the 13th among all other targets in priority, but its importance is expected to grow gradually. Although Korea does not account for much of China’s total investment, Chinese investment in Korea has been on the rise in recent years, and corporate investment is on an upward trend as well. The recent expansion of China`s investment in Korea reflects the impact of its policies and changes in its consumer market. For example, the manufacturing sector has accounted for an increasing portion of China’s overseas investment since 2015, while Chinese investment in Korea in this year also expanded in machinery and equipment sectors such as mold casting and mold manufacturing machinery and machinery for semiconductor manufacturing. This trend has become more pronounced in recent years. When considering how the Chinese government is planning to increase the portion of overseas investment by the manufacturing industry during the 13th Five Year Plan (2016-2020), it is likely that it will be able to attract investment from South Korean companies that have technological advantages in areas of interest from China in the future. Moreover, Korea is geographically close to China and can expect to enjoy tariff benefits and the alleviation of trade barriers by signing FTAs with major countries such as the U.S., Europe and Australia, which is why China is interested in Korea as a manufacturing base. China’s M&As are mainly centered on ICT and game-related industries or the financial sector, all areas in which Korean businesses are considered highly competitive. Recently, Chinese capital investment in insurance and science & technology-related industries in Korea has expanded, which is also explained by 13th Five Year Plan which promoted the advancement of China’s companies to overseas in the areas of industrial equipment, technology, standards, services, insurance, etc. In addition, as we see a change in China’s economic growth paradigm recently, the scope of overseas investment has also been diversified into IT services, consumer goods and distribution sectors, which can be seen as linked to China’s recent expansion of investment in Korea.
   This report presents some policy implications based on the analysis of China’s overseas M&A characteristics and outlook. First, we cite the need to redefine perceptions of Chinese capital and seek a win-win solution. Overall perceptions toward Chinese M&A have not been positive in the past, as seen in the cases of Ssangyong Motor Co., Hynix Semiconductor Inc., and the tightening of regulations by advanced economies such as the United States and Europe against China’s aggressive M&A. However, Chinese capital has already emerged as a big hand vying for the first or second place in the global M&A market. In addition, in the case of a leading global company acquired by a Chinese company, it protected shareholders’ interests through a high premium and provided a new opportunity for entering the Chinese market. These developments indicate that a win-win structure can be formed by selling and investing in future industries that need to be nurtured. Accordingly, Korea and China need to come up with measures to utilize Chinese capital in a mutually beneficial way through a shift in perceptions toward Chinese capital.
   Next, it is necessary to come up with measures to prevent leakage of core technologies and attract selective investment. As advanced economies such as the U.S. and EU tighten regulations on M&As by Chinese companies for fear of national security threats and high-tech leaks, Chinese companies are expected to aggressively pursue M&As for Korean companies with global competitiveness and high technological prowess. Up to now advanced countries have refrained from intergovernmental involvement as much as possible by accepting global M&As as market behavior, but now they are viewing these M&As as a part of China’s national-level industrial development strategy and have begun to tighten regulations. According to the analysis of this study, most of such cases of limiting investment occurred in the semiconductor industry. Given that most of the world’s leading companies that China acquired in the past actively pursued these M&As at a time when business conditions in the semiconductor industry were deteriorating, while semiconductor equipment manufacturers are currently enjoying a good period due to the booming global semiconductor market, we can expect Chinese capital to aggressively pursue M&As with Korean semiconductor equipment manufacturers should the market economy slow down in the future. Outside of the semiconductor sector, the U.S. and EU’s tougher regulations on M&A investment are likely to lead to an increase in China’s interest in Korea as a partner in its Made in China 2025 initiative and attempts by Chinese companies to merge with or acquire Korean high-tech companies. The cases we see of upgrade in the industrial structure of China’s private companies pose a potential threat for Korean business, against which institutional safeguards should be established to prevent the leakage of Korean technology and guarantee managerial control and job security, but at the same time they present opportunities for further cooperation in new industries. In addition, selective attraction of Chinese capital is needed. Although the attraction of Chinese capital may help create jobs and improve corporate financial structures, a thorough verification process on the financial structures of the Chinese acquirers will have to precede in order to avoid the risk of worsening financial status after takeovers, being lured by high premium offers, as shown by cases of reckless expansion or reliance on excessive borrowing regulated by the Chinese government.
   Third, it is expected that future M&As of Chinese companies will be carried out in conjunction with China’s Belt & Road operations. In particular, we can expect to see more Chinese M&As in the areas of finance, transportation infrastructure construction, culture and electronic commerce. Korea has agreed to cooperate with China by linking China’s Belt & Road initiatives with Korea’s New Southern Policy, and should seek opportunities to jointly advance into the markets of countries participating in the Belt & Road initiative, based on strategic partnership with China that draws upon Korea’s development experience and technological prowess. As part of China’s measures to utilize Belt and Road M&As, it proposes to secure a joint route into the target country’s market by first attracting Chinese companies’ M&As to Korea based on Korean companies’ comparative advantage in the ICT area, and then joining China’s drive for digital silk road construction projects in the future. In addition, the Chinese government is pushing to build overseas economic and trade cooperation zones, or overseas industrial cooperation complexes, for the stable development of overseas investment. Bilateral cooperation at such overseas industrial cooperation complexes has recently been the subject of discussions between Korea and China as part of their joint advances into third countries. Beijing proposes a way for South Korean companies to participate in industrial cooperation complexes built mostly by China in Southeast Asian countries, which should be conducted in the form of two-way cooperation between the two countries, meaning that cooperation can continue between the two countries in Korean industrial complexes built abroad as well.
   Considering the advantages that overseas M&As offer, such as revitalizing the domestic market, expanding new investment in the industry, creating more jobs and securing a path to overseas markets, it is necessary to review China’s pursuit of preemptive and active use of M&As, a trend which is likely to expand in the future. Implementation measures include identifying China’s demand for M&As in Korea, providing consulting services related to M&As, and providing platforms where suitable companies in Korea to be acquired are introduced. In addition, it is necessary to select target companies for 12 promising new industries emphasized by Korea, such as the bio, semiconductor and robot industries, which are related to the Fourth Industrial Revolution and offer high value-added and job-creation effects, and to establish an online platform that can match Chinese investors with domestic companies. Finally, it is necessary to consider establishing a monitoring system aimed at looking at the Chinese government’s overseas investment policies and investment trends, so that we can closely analyze and prepare for changes in the Chinese government’s overseas investment policy stance.
 

   China is pursuing the 'Internet Plus' Internet convergence strategy to create a future new industry ecosystem in which various economic and social sectors converge with the Internet through an Internet platform and ICT technology. Along with “Made in China 2025,” China’s Internet convergence strategy is an important strategy to realize innovation as a new growth engine for China. The strategy will be responsible for promoting industrial advancement and formulating an effective response to the 4th Industrial Revolution. It is expected to serve as a catalyst for China’s economic growth and an important factor that will transform Korea’s business model with China, as new industries through Internet convergence are growing along with the development of the Internet economy. With the development of the Internet economy, the market size of the new economy related to Internet finance (FinTech), online education, smart facilities, app-based business and smart city is rapidly growing in China. In addition, the country is promoting the innovation of software in the 4th Industrial Revolution and the transition toward “smart” processes in existing industries such as distribution, logistics, and manufacturing. In light of these developments, it is necessary to identify significant changes in Korea's future cooperation with China, particularly in relation to ICT manufacturing and Internet-related industries, an area where Korea is particularly strong.
   The Internet convergence strategy covers all areas of the economy and society and is having a great impact on China’s economic and industrial structure, production and consumption trends, business models, urbanization and regional development. This means an in-depth analysis is needed to establish a strategy for economic cooperation with China that is well suited to recent developments. In particular, each region of China has announced policies in accordance with the economic base or strategic goals of the region and implemented practical projects in order to promote the central government’s Internet convergence strategy. In some regions experiments are already underway to pioneer platform technologies of the 4th Industrial Revolution in the field of Internet convergence, which is already incorporating new ICT technologies.
   Based on this perception and background, this study examines China’s Internet convergence strategy to enable a preemptive response to changes caused by the 4th Industrial Revolution, and identifies relevant policies, technology and industry demands and related risks unfolding in some sectors and regions. The study then goes on to present new approaches to advance into new areas of the Chinese market and promote cooperation between Korea and China. In particular, we analyze the present status, nurturing policies, and local cases of smart healthcare, smart city, and artificial intelligence projects, which have a large impact on the economy and industry and generate high added value in 11 major fields related to Internet convergence.
   In Chapter 2, we analyze the background of the Internet convergence strategy in China, the main contents of the strategy, and the current state of infrastructure related to Internet convergence. In particular, the analysis was focused on the fact that China’s 'Internet Plus' strategy is more than just a policy to connect various sectors to the Internet, and should be understood as a very broad strategy to actively respond to the 4th Industrial Revolution being pursued in coordination with China's long-term development strategy. In November 2017 the Korean government announced I-KOREA 4.0, its plan to actively respond to the 4th Industrial Revolution. After the response plan was announced, specific strategies have been announced in each sector as well. These are sectors which have a large economic impact and areas where the Korean government intends to focus on. Current areas where detailed strategies have been announced are smart cities, smart healthcare and artificial intelligence. These three areas are also included in the Internet convergence strategy, which the Chinese government is focusing on. As such, we analyze each of these areas in Chapters 3 to 5.
   In Chapter 3, we analyze the status and policy of artificial intelligence development in China, and examine cases of promoting artificial intelligence-related projects by the city government of Beijing and major companies. China is in close pursuit of the United States, which has an unrivaled level of competitiveness in the global artificial intelligence market. In particular, China leads the world in accumulated number of AI-related papers and patent applications over the past 20 years, and ranks second in the world in terms of the number of companies and personnel in the field. In China, a large number of start-ups have been established around the Internet giant BAT, which owns a large amount of data, thus forming an organic artificial intelligence ecosystem. Leading companies are rushing to pioneer artificial intelligence core technologies and platforms. In particular, they are actively utilizing measures to secure core technologies by promoting investment and cooperation in artificial intelligence startups. They are also expanding their business areas and creating their own ecosystem in related fields through the establishment of an open artificial intelligence platform. As such, the development of artificial intelligence in China is led by the market, and the government’s policy support plays a facilitating role. Since the Chinese government set up a long-term development plan for artificial intelligence in 2017, about 20 local governments have announced policies for development of artificial intelligence suitable for their respective regions. Of these, Beijing is highly regarded as one of the most developed regions of artificial intelligence in China because of its excellent policy environment, research capacity, human resources and information technology related to artificial intelligence. In particular, Beijing has been analyzed as possessing strengths in the area of autonomous driving vehicles, and the city government is solidifying its development base by implementing systematic measures and pilot projects, such as establishing self-driving related norms, building test roads and pilot operation bases, and establishing innovation centers.
   In Chapter 4, we examine China’s Smart City development policies with a focus on the case of Hangzhou City in Zhejiang Province. First, we briefly review the development of global smart cities and current situation in China, after which we summarize the main policies and implementation system of China for the development of smart cities. The global smart city market is expected to grow to a $2 trillion market in 2025, with China in particular expected to drive fast growth. Approximately 500 cities in China are implementing policies to construct smart city projects, among which Hangzhou City is the most active and at a high level of development. The city of Hangzhou is pursuing a transition toward 'smart' processes in various fields, including transportation, administration, policing, environment and finance, among which the smart transportation sector is already evaluated as having succeeded in practical application. The Hangzhou model is being applied to other regions of China and overseas. Hangzhou City optimized its signal system through real-time collection, analysis and application of traffic data to facilitate traffic flow. In addition, it has been rapidly promoting the use of smart technology in all areas of traffic including parking, traffic accidents, and policing of traffic violations. The achievements of the Hangzhou City Brain Project can be attributed to an ecological system where each actor carries out its own role effectively to create a virtuous cycle structure. The central government of China has presented general directions for the development of smart cities, while creating an institutional environment favorable to the development of new industries, including the integration and sharing of public data and the comprehensive implementation of the personal information protection system. Hangzhou’s municipal government directly created demand in the field by commissioning the technologies and services needed to create smart cities in the form of government procurement orders. Hangzou has also designated certain regions as test beds for the new technology, encouraging companies to actively participate. Alibaba has supplied the government with city operating systems through its cloud and artificial intelligence platforms, while providing the platforms needed to implement services to small start-ups with detailed technologies needed to run the cities. Small- and medium-sized startups seek to innovate technology and improve quality based on the test bed projects provided by the government and technology platform created by Alibaba, and in this manner contribute to improving the quality of citizens' lives.
   Chapter 5 examines the development status of the smart healthcare market, which represents a convergence between the Internet and public services, the policy and implementation system of central and local governments, and the industrial ecosystem and regional applications, going on to analyze the characteristics and issues of the industry. Currently, the global smart healthcare market is developing in the U.S., Germany, and other advanced countries. In the future, the Chinese market is also expected to see high growth, focusing on online trading of drugs and online medical treatment. Due to limitations in statistical data, there is a limit to understanding the market by region, but the market size of the eastern coastal region is large. In 2018, China’s central government announced a comprehensive guideline on smart healthcare services. This was followed by the release of local government documents reflecting the central government's guidelines. In addition, the policy implementation system was formed with the National Health and Health Commission at the center, and government projects for health care data were carried out at the national level through state-owned enterprises. In addition, an industrial federation was formed and is being operated under the supervision of the National Health and Health Commission and the Institute of Information and Communication. An industrial ecosystem encompassing companies in various fields, including Internet hospitals, data analysis and artificial intelligence, and genetic analysis, creating an online treatment platform in China. The business expansion of Tencent, an IT company representing dual Guangdong Province, and Ping An, a financial company, is proceeding quite actively. The local hub hospital in Guangdong Province and IT companies in the region have jointly established an Internet-based medical treatment platform, and local governments and IT companies are collaborating to develop big data projects in the health care sector. The unique environment in China, such as the lagging state of medical services, acts as a positive factor when it comes to embracing new technologies in China and establishing a self-sufficient ecosystem. Also, in terms of the institutional infrastructure that must be established to provide services, China has been undergoing trial and error and is now in the process of revising relevant laws and regulations.
   In Chapter 6, we drew implications for Korean companies and the government, based on the results of our analysis of major regional cases. For the development of the artificial intelligence (AI) sector, the Korean government should establish long-term and sustainable artificial intelligence development policies, among other things, and come up with support measures to ensure that the artificial intelligence-related ecosystem is smoothly established. Major Chinese enterprises and global AI firms are striving to build their own ecosystem and expand their market dominance through an open artificial intelligence platform. In response, the Chinese government has designated leading companies to create artificial intelligence ecosystems in key areas, seen in projects such as  the Baidu autonomous driving, Tencent medical care and video imaging, and  iFLYTEK voice recognition projects, and has implemented the National Next Generation AI Open Innovation Platform to provide various forms of support. It will be necessary for the Korean government to actively support the establishment of the artificial intelligence open platform for Korean companies. In addition, Korean companies need to establish a strategy to build an ecosystem in relevant areas by offering an open platform and expanding their market presence. At the same time, it could be worthwhile to consider entering into the alliance ecosystem by participating in the National Next Generation Artificial Intelligent Open Innovation Platform, which is receiving the policy support of the Chinese central government and leading the market in each field, as a partner company.
   In the Smart City sector, as seen in the case of Hangzhou City in Zhejiang Province, government-led demand generation and corporate technological prowess have emerged as important development factors. The government needs to propose a specialized and mid-to long-term roadmap for smart city development and actively promote projects to directly generate market demand. It is also important to provide a test bed where the new technologies and services of an enterprise can be directly applied to the lives of the citizens. Institutional innovation and support within the space are essential elements as well. As of yet, the current projects in progress within Korea remain limited in scale and slow to develop, while the numerous institutional regulations blocking the utilization of data are pointed out as major obstacles. In addition, smart city projects have important implications for the lives of citizens and are very public in their nature, meaning private companies could struggle with various disadvantages in terms of short-term profit. At the same time, however, companies can enjoy promotional effects such as raising corporate awareness and improving their image by participating in public services that are certified by the government and directly used by city residents, and feedback and data from the service process will also have a positive effect on improving their product quality.
   Finally, in the smart healthcare sector, the implications for the Korean government and corporations are as follows. First, the Korean government needs to introduce and nurture smart healthcare service as a way to solve problems in medical service. At this time, it is necessary to identify priority areas where improvement is urgent, and to form a market and mitigate the impact on existing industries. Also, flexible policies should be applied to companies participating in new businesses that require deregulation. Finally, effective data integration management methods suitable for the Korean medical system should be considered in relation to data, which is a key element of smart health care innovation. While Korean companies can expect to see enormous business opportunities in China, even Chinese companies are still facing challenges in generating profits, so Korean companies must carefully design their own profit model in advance. Other tasks to consider in advance will be to gain an understanding for the characteristics of Chinese policy operations and policy-related risks, and to consider cooperation with large Chinese enterprises in order to mitigate the related risks. It is necessary to carry out localized strategies in line with China's rapidly changing industrial ecology and market changes, and actively utilize local government policies and domestic business support institutions when planning to directly enter the market. Last but not least, while location selection may not be a crucial factor when it comes to the smart healthcare industry, the cases we examined in Guangdong Province show a good example of collaboration between local anchor companies and central hospitals, government agencies and startups in the initial stages of business implementation. Therefore, companies looking to advance into the local market should first understand and make considerations for the local and regional industrial ecosystems in which their cooperation partners operate within.

 

   President Moon Jae-In proposed the three principles and eight ways of cooperation for new economic cooperation strategy with China. The three principles and eight ways of cooperation are the basic directions and guidelines for the Korean government to develop economic cooperation with China in the future. This study puts forward detailed measures for cooperation in major areas, taking full consideration of changes in internal and external conditions surrounding the Korean and Chinese economies.
   First of all, there is a need to enhance the stability and substantiality of bilateral cooperation by improving and consolidating the existing institutional frameworks in order to secure the stability and substantiality of the Korea-China economic cooperation. It will be necessary to maintain a two-way dialogue channel that requires the government to push forward future-oriented cooperation through a Korea-China economic ministers’ meeting centering on the Ministry of Strategy and Finance, and that sensitive trade issues be raised through a joint committee on the Korea-China FTA. In addition, working-level consultations will have to be continued so that cooperation can be materialized in the direction of achieving substantial results. In order to do this, it is necessary to actively utilize Korean, Chinese experts and provide a communication platform for spreading consensus and securing trust through public diplomacy.
   To suggest ways for enhancing the quality of trade between Korea and China, we analyze the participation in GVC at the national- industrial level and examine whether such participation contributed to upgrading the economic and industrial structure. We use data on 18 manufacturing industries in 43 countries from 2000 to 2014, and analyze whether forward participation and backward participation contributed to the value-added generation of industries.
   In addition, the results of our analysis on Korean and Chinese industries are similar to those of the rest of the world. Particularly, it is shown that forward participation has a relatively greater positive effect on the creation of value added in the industry compared to reward participation. In the context of GVC proliferation, measures to enhance the quality of trade between the two countries through industrial development and upgrading of economic structures can be summarized as GVC participation and upgrading.
   In the face of the 4th Industrial Revolution era, Korea and China have also proposed ways to cooperate in new industrial sectors. Witnessing the changes caused by the 4th Industrial Revolution, the status of development of new industries in China was analyzed with a focus on artificial intelligence (AI). Major analysis items related to new industries include promoting strategies, size and characteristics of investments, analysis of major business cases, problems and limitations, major AI technology applications (AI+), and comparison with major countries. Considering the limitations of government statistical data, we compare the competitiveness of Korea and China, such as global market share, revealed comparative advantage index and trade complement index, focusing on six new industries (intelligent robots, system semiconductors, electric vehicles, aviation- space, advanced medical devices, lithium). The cooperative cases of the New Industrial Sector in China were largely classified into three types: first, they were classified into vertical integration types, in which relatively recent leading companies led investment; secondly, global cooperation; and thirdly, government-led types that cooperated with foreign companies in the form of strategic alliances, etc. Considering each type of the cooperation cases, we propose the cooperation plans as follows: first, to develop a system for fostering and supporting start-up companies with vertical integration with major Chinese large companies; second, to support small and medium- sized enterprises with technological superiority and to establish an innovation system with which core components and intermediate goods can be supplied; and third, to target the Chinese market and overseas markets through strategic alliances with leading Chinese companies in the AI field.
   The Korean government emphasizes the importance of revitalizing start-up ventures in order to secure future growth engines and create jobs for young people, meaning there is a need for cooperation with China. China has also started to popularize startups and innovations under the banner of 'popularization of startups, human innovation' . The background of the Chinese government's start-up venture started from the increasingly high level of inflation, the elimination of real unemployment, and a desperate measure to upgrade the economic development centered on small- and medium-sized venture businesses and the Chinese-style innovation model through startups. We analyze the changes and growth contents of the startup venture ecosystem of China, which led to innovation and job creation in China and examined the direction of government-led core platform innovation, and based on this we propose the methodology of mutual win-win through open innovation cooperation and joint fund-raising between Korea and China.

   With regard to cooperation in the energy sector between South Korea and China, the two countries are facing a difficult situation after the global financial crisis. In the renewable energy sector, energy cooperation between Korea and China is not as easy as it used to be due to the capital increase of local Chinese companies, advances in domestic and overseas markets based on mass production and sales of cheap products, and the support of the central government and policy financial institutions for major domestic and overseas projects. In order to reflect the demand for energy cooperation between the two countries, the central governments of Korea and China have already made efforts for energy cooperation, but to further boost cooperation, they have proposed the nationwide spread of carbon emission trading by the Chinese central government, the process of promoting new energy generation outside of GEI, solar and wind power, and the development of new energy technologies and the use of opportunities for building energy infrastructure in China. In addition, Korea and China should reduce their reliance on thermal power, increase the proportion of renewable energy centered on solar and wind power, and emphasize the institutionalization of cooperation measures.
   Environmental cooperation between Korea and China has greatly expanded over the past few years. However, the lack of detailed information on the areas concerned, together with the systems implementation and methods of work in place at the Ministry of Environmental Protection, Forestry, National Development and Reform Commission and its affiliates, which are the main departments responsible for China’s environmental policy, has been a source of distress in the process of promoting cooperation. China is rapidly changing its environmental policies for the implementation of the Environmental Protection Act, the Air Pollution Prevention Act, and the announcement of action plans to improve air and water quality. This change in China’s environmental policy means a change in China’s policy demand in Korea-China environmental cooperation, and will pose challenges and provide new opportunities for environmental cooperation between Korea and China. Impacts from environmental pollution among countries are expected to increase from economic growth with pattern in resource use. It is necessary to review the environmental policies of China and Korea in order to enhance the efficiency and effectiveness of environmental cooperation between Korea and China to overcome environmental issues. As a solution to the environmental problems that the two countries can jointly strive for, the government has proposed to improve the constitution of eco-industrial development, which increases the efficiency of resource use and minimizes environmental pollution by reusing unused or by-products as raw materials or energy of other companies. It will be necessary to share the experience of implementing programs such as China’s circular economic complex (CIP) and domestic ecological industrial complex and analyze the transition to a clean production system through the efforts of various technological development and information exchange. We also emphasize the need for environmental cooperation between Korea, China, and also Japan to address current environmental issues including air quality. Other proposals include cooperative measures for sharing technologies, experiences and policies for building eco-friendly cities.
   The joint entry into infrastructure projects in third countries was analyzed based on China's one-to-one policy. The one-to-one policy aims to expand logistics networks through infrastructure investment in areas of economic interest by China, develop China's borders and expand its influence on neighboring countries. Since then, the Chinese government has signed agreements with more than 30 countries to materialize the one-on-one policy implementation. International cooperation is ongoing, including Indonesia's Bandung High Speed Railway, Hungary-Serbia Connecting Railway, China-Russia Natural Gas Eastern Line Corporation, Pakistan's Gwadar Port development and Kazakhstan's Yanun River Logistics Base. South Korea has been lacking in connectivity with one-to-one policy, but the recent improvement in the North Korean nuclear issue has caused a sharp rise in the Korean Peninsula's logistics program. Accordingly, we expect the necessity for three north-eastern provinces cooperation in international logistics policy, including Russia, Mongolia and South Korea. We review the three country’s pilot projects of joint advancement between China-Japan and analyze its major issues, also going on to seek a strategy of joint advancement and ways of cooperation between Korea and China for infrastructure projects.
   Lastly, in the area of promoting human-centered private exchanges and cooperation, we discuss the Chinese people’s current expectations of Korea, and the needs and necessities felt by the Chinese people. If the Korean and Chinese people could together resolve the deficiencies and dissatisfaction they commonly feel, the friendly relations between the two countries will continue to grow in the future. For this, first, this study analyzed the limitations and problems shown in the private exchanges between Korea and China, and suggested improvement measures. As an example of a ‘human- centered private exchange’ project, this study suggested projects to resolve environmental issues and cultivate talent, mainly because environmental issues have recently had the largest negative impact on mutual perceptions due to keen public interest in both countries. The Korean government should establish a system to raise the level of active exchange in the private level, and also futher develop its dialogues with the Chinese government to compose a platform that could spread the outcomes of individual projects. Human-centered private exchanges could be finally accomplished by introducing the process of solving realistic problems in which the people of both countries share great interest through private exchanges. 

 

   The A number of challenges have been burdening the labor market of Korea today, including the deceleration of the speed of jobs creation, the increase in youth unemployment and deepening of ‘dual structure’ of the labor market. The weakening of Korea’s economic growth dynamics and the corresponding bottleneck in implementing the traditional growth engine of the Korea economy – Economic Growth and Jobs Creation through Export Expansion – are often quoted as the main causes of these difficulties. The Moon administration has been making enormous efforts to counter these unwelcome trends, by establishing the Presidential Committee on Jobs and adopting a jobs-centered approach to policy enforcement. However, the achievement is rather unsatisfactory so far. Therefore, it is quite timely to check the effectiveness of the current policy instruments and to adopt a new orientation in the policy making for jobs creation.
   Against this backdrop, this research has been carried out to provide the policy makers with hands-on and useful policy implications, based on case studies conducted on three European countries that have and had experienced similar situation over the past decades. Countries selected for case studies are three European countries, Germany, France and Ireland.
   Chapter 2 of the report scrutinized the major issues related with jobs creation and trends of jobs creation in major countries in the world. It is discussed in this chapter that the diverse labor-market problems have different root causes, so that the policy efforts to cure these problems should also take the diverse causes and different policy transmission mechanisms into consideration. After reviewing a number of publications on the relevant issues, the chapter summarized the main challenges facing the national labor markets in the following five points: (i) income disparity and employment gap by gender; (ii) employment gap by the level of education; (iii) widening gap between the regular and irregular workers; (iv) distribution problem related with the productivity gains; (v) stagnant wage increase; (vi) high youth unemployment; and (vii) issues related with employment of elderly workers.
   After this overview of labor market issues, Chapters 3-5 have been devoted to case studies on Germany, France and Ireland. These European countries have experienced common fates since the outbreak of the global financial crisis in 2008. As they are all member countries of the Eurozone, they have had similar macroeconomic developments since the 2010 Eurozone sovereign debt crisis, especially in terms of macroeconomic and labor-market performances. The research team went beyond these recent crises in order to draw meaningful and useful implications for Korea, and analyzed the country-specific labor-market developments since the 1980s, as well. In fact, Germany experienced economic shocks caused by the unification of two German states in 1990, while Ireland had experienced severe setbacks during the economic recession in 1980s. Policy reorientations and instruments that were put in place to cure these country-specific problems would provide a number of policy implications that can be referred to by the Korean government, as they were devised in times of economic difficulties, as experienced by the Korean labor market in recent years.
   Chapter 3 was devoted to the case study of Germany. As noted before, the German economy has experienced two common crises and one specific economic shock caused by the 1990 unification of the two German states, which forced the country to implement a major economic reform, including the strongest-ever labor-market reform called “Hartz Reform” around 2005. In addition to the well-documented and well-researched Hartz Reform, the German economy has set an exemplary case of social partnership by the successful negotiation and implementation of the Auto 5000 Program. The Auto 5000 Program was initiated and proposed by the managers of the Volkswagen AG to the trade union and the city of Wolfsburg, especially as an instrument to save jobs that would otherwise have been lost due to the difficulties facing the company as a result of fierce international competition. The management and the trade union reached a “win-win” solution after a long negotiation, which can provide a lesson to the Korean counterparts, as there has been an experimental exercise of similar model under the leadership of the Gwangju Municipal Government. The case study provided a meaningful conclusion that “mutual trust” is a desperately needed social capital that has not been yet observed in the Korean society.
   The case study of France was conducted in Chapter 4, mainly focusing on the main policy reorientation by the French government and the strengthened interests of the French policymakers in the support for the startup companies. In fact, an interesting policy change has been observed in the overall economic policy of the French government. While public institutions have traditionally had a strong influence in economic activities, the Macron government since May 2017 has been placing the private sector role at the center of economic policy-making. It was one of natural consequences of this policy reorientation that they started supporting the startup companies more rigorously. The French Tech was established as a hub for all the supporting activities for the startups, and a number of private and public startup campuses have been established and started to generated synergy effects. A characteristic of French policy is seen in how the traditional French virtue of tolerance and liberalism were observed in the government support activities for the startups; the government subsidies for startup companies were provided regardless of the nationality of the companies (tolerance) and highly talented human resources were given the chances to settle down in France for the purpose of making the landscape more colorful and competitive (tolerance and liberalism).
   Chapter 5 was reserved for the case study of Ireland, a country which joined the European Union (EU) in 1973 and has experienced unprecedented economic growth ever since. In fact, the Irish per-capita income was below 60% of the EU average before 1973, but has risen to above average and is one of the top nations within the EU today. The attraction of FDI into Ireland, especially in the sectors of knowledge-intensive and top-notch services industries have been main vehicle for the economic growth and sustainability of Ireland. The Irish government established the IDA (Industrial Development Authority) as the organization fully in charge of FDI attraction, and set up highly competitive vocational education and training (VET) scheme. This research scrutinized the VET system of Ireland more detailed, and found a number of interesting and useful implications that can be utilized by Korea. For instance, by adopting the Action Plan for Jobs (APJ) during the period of 2012-2018, the Irish government has shown its strong commitment to jobs creation. Also, in implementing the jobs strategy, the public institutions, such as the Enterprise Ireland and IDA, adopted a self-monitoring mechanism, which checked the achievement of job creation regularly. Another success factor was that the cooperative system established both among the public institutions responsible for job creation and between the private-sector and public-sector institutions, thus leading to the maximum effectiveness of the policy instruments.
   Chapter 6 summarized and evaluated the case studies and proposed a workable “job creation model,” which described 7 policy tasks leading to job creations in the Korean context. The conclusions drawn in Chapter 7 are all directly related with these 7 policy tasks. Main conclusion of the report are as follows. First, productivity gains are one excellent source of more jobs. As observed in the case of Germany and Ireland, productivity gains in small and medium-sized enterprises (SMEs) would over-proportionally contribute to job creation. However, an excessive wage increase would undermine the capability of private-sectors job creation. Second, if job creation is high on the national agenda, one should seriously consider the performance of job creation as one of important evaluation indicators for the institutions established for attracting FDIs and/or supporting SMEs. Third, as for the support for startup companies, the role of the government is especially important in the early phase of startup activities. The government should introduce startup-friendly business environment and ensure the maximum synergy effects to unfold, thereby raising the overall productivity level of the startups and even the existing companies. Also, tolerance and liberalism we have identified as success factor of French startup support policies could be implemented in Korea, in order to drastically improve the startup ecosystems. Fourth, a close collaboration with advanced multinational corporations has proved an excellent instrument for job creation in Ireland, which could be localized and emulated by the Korean government. Especially important in this context is to bring about an effective scheme through which the capability of local companies can be expanded through contacting, cooperating and even cross-possessing ownerships with the MNCs. Regulations related with joint ventures (JVs) should be eased for that purpose. Fifth, in the areas of education and vocational training, forward-looking in-depth research is needed to predict the future development of industrial structures and the amount and pattern of labor demand from the newly emerging industries. This is a prerequisite for the introduction and implementation of appropriate educational and vocational training systems. Sixth, a clear-cut division of labor between the government and public institutions on the one side and the private sector on the other is one necessary condition for the success of all job-creation efforts. The government should focus on making the labor market work under the leadership of companies through setting rules and adopting needed regulations, thus leaving room for the labor demand and supply to unfold and finally settle in the labor market. Seventh and finally, as for the social partnership it is found that mutual trust between the stakeholders of the labor market, especially between the employers and employees, is one of most important social capitals. In the history of modern Korea, we can rarely find an event where mutual trust was contributing to the settlement of any labor-related disputes. In fact, we have seen too many adversary cases where mistrust resulted in the failure of any efforts for friendly settling disputes. However, the recently reached agreement on the establishment of the Gwangju Job-creation Model between the Hyundai Motors and Gwangju Municipal Government is a welcome result of long-lasting negotiations. The research team is pretty much in the hope that a successful implementation of this model could be an excellent basis for the accumulation of mutual trust. For the continuation of this project, and to bring about second and third such win-win deals, the government will need to take an active role. 

 

   This study examines EU2020, the development strategy of the European Union, with a focus on its background, implementation system, and the characteristics and the means in the fields of industrial policies and labor market policies.
   The Europe 2020 strategy was presented in the context of challenges posed by globalization facing the EU and its social change. With China emerging as an economic power to challenge the dominance of the United States, it is becoming more and more difficult for the EU to maintain its current geopolitical and geopolitical importance. Climate change, energy needs, and demographical issues such as aging and immigration, are serious challenges to its economy and society. Europe 2020 is a comprehensive growth strategy to achieve sustainable development in response to these problems, which simultaneously embodies the value of innovation and inclusion. In addition, the inclusion of environmental and social values ​​is also emphasized. For its implementation, the evaluation and monitoring system at the EU level has been strengthened to create a close link between economic and financial strategies. In addition, to overcome the limitations of the flexible open system, the evaluation and monitoring functions of the executive committee have been strengthened and the partnership participation of various interest groups has been expanded.
   In the historical context of industrial policy, Europe’s industrial policies have traditionally been based on horizontal approaches which do not appear to have substantially changed in Europe 2020. However, the strategy incorporates a so-called matrix-type policy structure that takes into account sectoral and regional characteristics on the basis of a horizontal approach centered on policies to foster innovation and competition. In contrast to the traditional approaches, which focused on the function of the pseudo capital market, directing production resources such as capital to specific industries, the industrial policy of the EU is focusing on  creating conditions for innovation by establishing an “information market” and promoting R&D.
   The new industrial policies of the EU, represented by the flagship initiative of “industrial policies in the era of globalization,” are a combination of smart specialization strategies based on entrepreneurial self-discovery and strategic coordination and open-innovation policies based on an industrial ecology system in which industry-academia cooperation and civil societies play a key role. Although there is a consensus on the necessity of such an EU industrial policy in the long term, several issues remain in regard to its implementation. These include the absence of a clear definition of responsibilities and coordination among the executive committees in charge of industrial policy, the fragmentation of policies and low synergies resulting therefrom, the ambiguous division of labor between the EU and its member countries, and differences in policy formulation and implementation due to differences in historical backgrounds and economic systems among the latter.
   Another flagship initiative of Europe 2020, “new technologies and jobs,” has four priorities: improving labor market operations, providing employable skills, improving job quality and working conditions, and supporting job creation and labor demand. In order to achieve these goals, the EU has fostered dialogue among the social partners and carried out legislative improvements at the EU level, based on an evaluation of the effects of existing policies and regulations. However, the result of the interim assessment in 2014 was that “the initiative was not successful in creating a consistent framework for employment policy.” Following a mid-term evaluation, efforts have been made to clarify employment-related policies directions in the European Employment Guidelines and to regularly review their implementation by individual member countries within the framework of the European Semester. Although the overall employment situation in the 28 member countries of the EU has improved since the mid-2010s, there are still structural problems in the EU labor market, such as low employment rates in the southern member countries, low employment rates among the young and the less educated, the segregation of labor markets, deteriorating matching efficiencies between labor supply and demand, sluggish growth of real wages, and increase of “in-work poverty.”
   The following are some important policy implications that can be drawn from these EU experiences.
   First, the so-called horizontal approach focusing on correcting market failures in industrial policy should not be the only option. The horizontal approach is favored as a counteraction to the vertical approach to select specific industries which was once prevalent in East Asia. However, depending on the characteristics of the industry, the institutional characteristics of the region, and the effectiveness of policy implementation, a vertical approach may be preferred in some cases. The experiences of the EU show that a bias towards the horizontal approach can make it difficult to achieve performance within a given period of time.
   Second, a shift in the perspective on industrial ecosystems is necessary as evidenced by the smart specialization and industrial and innovation policies of the Open Innovation 2.0 paradigm. Perceiving the economy as an ecosystem implies the assumption that every pertaining subject, including the public, the private sector, the research sector, and the citizens, participates in innovation and economic activities. Therefore, the relationship among these players is complementary and horizontal based on the principles of check and balance. Therefore, competition and cooperation should interact and, based on the interplay that results, the market and reputation-based mechanisms must function simultaneously to perform a screening role.
   Third, the role to be played by the public sector must be reformulated in relation to the second issue mentioned above. In a situation where a holistic innovation is needed that encompasses not only technological innovation but also social innovation, it should be kept in mind that the public sector can play a variety of important roles, providing tangible and untangible resources or the competencies needed to form a platform that can support innovations, coordinate interests, purchase innovative products, create markets, and employ public finance to catalyze additional private investment.
   Fourth, it is necessary to escape from the obsession with “cutting-edge” projects. There is a tendency in industrial policies in Korea to prefer radical projects which do not sufficiently take into account the competitive advantages the country or region already possesses. On the other hand, the smart specialization strategy promotes structural changes in a country or a region. This necessitates consideration for various paths such as “modernization” or “diversification.” These are strategies that try to strengthen public support for interfaces between general purpose technologies and existing industries to encourage convergence between them, thereby upgrading existing industries. In order for such a strategy to be successful, it is necessary to choose an appropriate path based on the identification of existing strengths and weaknesses.
   Fifth, the EU 2020 strategy seeks not only to increase productivity, but also to strengthen inclusive policies to maintain and expand employment. The growing interest within the EU concerning employment in the manufacturing sector since the global financial crisis is due to the recognition of various problems that weaken manufacturing competitiveness. In particular, local communities can eventually collapse in areas where the industrial base is weakened due to a lack of skilled labor and equipment investment, which in turn makes it impossible for the manufacturing industry to recover. As such, while making efforts to increase the competitiveness of existing industries, measures should also be considered at the same time to strengthen social safety nets that can minimize the negative effects of industrial restructuring.
   Sixth, in the context of labor policy, it is important to promote autonomous social dialogue between labor and management representatives. In particular, when implementing the concept of “flexicurity,” a balance of flexibility and stability is essential. In this regard, the government needs to actively utilize financial resources for clearly targeted purposes when necessary.
   Seventh, in order to adapt to rapidly changing technologies and to match demand and supply in the labor market, it is necessary to place a high policy priority on constant improvement of education and training systems through cooperation between industry and education/training institutions. 

 

   When speaking of the European economy, small and medium -sized enterprises (hereafter SMEs) have been playing a pivotal role in creating jobs and adding value to products. In this sense, the EU and the Member States are focusing on SMEs for innovative growth as a core element of sustainable development. The Korean government is also eagerly supporting SMEs to enhance their competitiveness. Yet there is room for policy improvement. This report will overview the important aspects of SME policies of the EU and selected Member States. Based on the findings we will make suggestions for the advancement of Korea’s SME policy.
   European SMEs take a share of 99.8% among the total number of enterprises and account for 66.4% of the number of jobs, and 56.8% of value creation. Despite this high performance by European SMEs, their innovative competitiveness does not necessarily match that of the large enterprises in Europe. Moreover, many European SMEs complain about the hardships of internationalisation, particularly in finding international buyers, competing with other companies in similar fields, financing, etc., which is another indicator of their competitiveness. Considering this situation, the EU has been providing a number of guidelines and policies to support SMEs, such as the Small Business Act (SBA), COSME programme, funding, and programmes to assist their internationalisation and standardization. The SBA proposes 10 principles in promoting entrepreneurship, such as “Think Small First”, and access to finance, innovation and technology, based on which the governments of Member States have established domestic legislation on SMEs. COSME, an SME competitiveness enhancing programme, involves financing, internationalisation, protection of intellectual property rights, etc. In terms of funding, the EU is trying to ease the gap between SMEs and large-companies’ loan interest rates and to support market access and technological innovation by utilising EIC funding. In particular, the SME Instrument has been used to financially support SMEs with innovative technology. The EU has announced a strategy for the circular economy and is supporting the transition to an environment-friendly economy. The EU has also been reinforcing its support for standardization, not only for SMEs but enterprises of all sizes, to harmonise differing standards within the Member States as well as to have the EU standards adopted at the international level. Stronger financial support is being provided for the stakeholders in the discussion of standardization, to lessen their burdens in order to participate in the discussion actively.
   As the Member States ultimately lead policies to support SMEs with EU-level policy playing a supplementing role, it is important to analyse policy features at the national level. Therefore, based on the national competitiveness index and industrial characteristics, in this research we selected Germany, France, Italy, and the Netherlands for our case study. Germany, famous for its “hidden champions,” has been carrying out the “Future of the German Mittelstand” Action Programme to secure financial support and boost the growth of its SMEs. Based on this programme, the “Mittelstand-Digital” strategy operates to convince SMEs of the need to digitalize their operations and provide customized services. The Central Innovation Programme for SMEs (ZIM) not only provides financial support for R&D at SMEs but has since been expanded into an international cooperation network to support SMEs. The management and technical innovation consulting programme “go-Inno” and technology transfer support programme “INNO-KOM” are also assisting SMEs in practical terms.
   France, facing a similar problem with Korea of ensuring the growth of both large companies and SMEs, announced the Action Plan for Business Growth and Transformation (PACTE) in 2018. PACTE provides a wide range of support, such as to facilitate the establishment of firms, revitalise unsuccessful companies, company transfer, financing, R&D technology support, compensation for employees, etc. with the aim of easing the burden of emerging companies. The “competitive cluster” policy provides additional benefits for SMEs struggling with competitiveness issues and technical development, and the “La French Tech” policy aims to nurture regional start-up clusters and invite competitive start-ups.
   Italy is supporting start-ups to become competitive SMEs through investment cooperation. The nation actively manages the brand “Made in Italy” and exercises strict quality control over SMEs authorized to use it, providing a good example of brand management at the national level having a positive effect on companies. Italy also operates regional clusters to increase the competitiveness of its SMEs.
   The Dutch industrial policy is based on a top-sector approach. The nation operates an innovative incentive scheme (MIT) that aims to help SMEs take part in innovation, and which has been positively evaluated for the role it plays. SMEs and start-ups can receive specialised support such as from the Netherlands Organisation for Applied Scientific Research (TNO). These research institutions link the companies with the government and complement the role of the government by providing the practical support that SMEs need.
   Just like the SME policies of the EU and the Member States, Korea’s SME policies are comprehensive in scope and involve many different ministries in various ways. Despite these similarities, Korea’s policies mostly differ from the EU and the Member States at the micro level and enforcement processes. This indicates the need to measure the effectiveness of existing policies, obtain feedback, and perform an overall re-examination of their performance efficiency. In this context, and based on the case studies, we are suggesting the following implications for Korea.
   First, it is essential to support the establishment of an online cluster network to improve utilization of the clusters. This online cluster network will enable the companies to receive integrated support directly by intra-cluster or inter-cluster support. To achieve this goal it is important to prepare a detailed phasing strategy.
   Second, we can consider establishing nation-wide competence centres in Korea. Korea already has numerous types of SME support centres. For better performance it is crucial to present a clear and specific objective, for instance, providing specialised support for digitalisation of the SMEs. This should be done considering regional characteristics, such as logistics digitalisation for regions specializing in logistics and e-commerce support for regions where marketing and online business is active.
   Third, it will also be necessary to greatly expand the functions of technical research institutions, which play a significant role in the Netherlands, Sweden, Denmark, and Germany. Offering more assistance for research support institutions will help SMEs to receive the support they need with specific issues in the areas of R&D, technical difficulties, training human resources, finance and taxation problems, etc.
   Fourth, the introduction of an integrated nation brand of Korea would help SMEs to export or expand overseas, especially those who lack a well-known brand name. Considering the elevated nation brand value of Korea, thanks to developments such as the Korean wave (Hallyu), establishing an integrated nation brand will have a significant impact. Once Korea establishes an integrated nation brand, SMEs who wish to utilise it would voluntarily participate in efforts to improve their product quality and competitiveness in order to acquire the rights to use the integrated nation brand.
   Fifth, it would be wise to establish an institutional basis for outward processing in advance to provide for the internationalisation of SMEs and their involvement in value chains. Policies to facilitate trade will be of great help toward this. Considering the future of the Korean Peninsula, establishing an area for outward processing would also be important for cooperation between the two Koreas. 

Executive Summary

1. Introduction

2. Conceptual Framework

3. Empirical Model

4. Data

5. Empirical Results

6. Robustness Analysis

7. Conclusion

References 

The purpose of this paper is to examine whether or not there is a spillover effect of third countries’ regional trade agreements (RTAs) on their bilateral trade relationships. To identify the RTA spillover effects, we expand a gravity model into a third-country framework using a dataset of bilateral trade and RTAs for 62 country-pairs over the period 2002-2013. We construct a weighted third-countries’ RTA contiguity matrix as well as a spatially-weighted matrix to identify both the spillover and spatial effects of RTA on trade flows. The results show that the spillover effects of RTAs on trade are positive while the spatial effects of RTA are negative and imply that third parties’ RTAs have complementary effects on bilateral trade while the existence of neighbors in the RTA between the two trade partners reduces their bilateral trade. As a result, the proliferation of RTAs expand international trade through spillover effects as well as trade creation and trade diversion.

 

Keywords: regional trade agreements, spillover effects, spatial effects, gravity equation
JEL Classification:  F14, F15 

 

 

 

   The World Trade Organization (WTO), launched in 1995 as a successor of the GATT system, has ambitiously begun its first multilateral trade negotiation round, Doha Development Agenda (DDA) in 2001. Since then, notwithstanding with its great ambition, the DDA has failed to draw visible results for more than 17 years, and hence confidence in the WTO-centered multilateral trading system has been declining accordingly. Nevertheless, there are some of the accomplishments of the WTO. The liberalization of the commodity markets has expanded and deepened through the conclusions of plurilateral negotiations under the WTO such as the Information Technology Agreement (ITA) and the Government Procurement Agreement (GPA), and rules in service and intellectual property rights have been set-out and established. As a result of these achievements, the volume of global commodity trade has increased by more than three times, and the market share of developing countries has also increased from 28% in 1995 to 43% in 2017. The expansion of the number of member states is another achievement of the WTO. Although such expansion may have increased the difficulties and complexity of decision making in the WTO, it is clear that the expansion of new business opportunities by successfully incorporating developing countries into the global economy and applying unified WTO rules and standards is an achievement of the WTO. Along with the strengthening of the dispute settlement system, the Agreement on Trade Facilitation (TFA) and its implementation are the greatest achievements of the WTO system. The Trade Facilitation Agreement is the first multilateral trade agreement concluded after the establishment of the WTO and the launch of the DDA negotiations, while the Information Technology Agreement and the Government Procurement Agreement are plurilateral agreements. Economically, it is expected of the increase in exports by more than $ 1 trillion, the creation of 20 million export-related jobs, and the increase in the world's GDP by about $ 960 billion due to the reduction of trade costs and the improvement of trade environment.
   The limitations and problems of the WTO system are as clear as these achievements. In particular, governance issues that have long been pointed out are such typical examples. Decisions in the WTO system are in fact made by consensus, and enlarging the number of Member States has become a decisive factor in hindering efficient decision-making in the WTO. Although The ‘Single Undertaking’ principle of concluding the agreement contributed to maintaining the consistency and stability of the multilateral trade system, it caused the problem of the rigidity of the WTO system at the same time. The dispute settlement procedure is also increasingly problematic. Recently, the dispute settlement implementation process is increasingly followed by the retaliation process. In such processes, the situation in which the complainant must observe the implementation failure of the defendant until the retaliation is approved is undermining the fairness of the WTO system. Not only that, the lack of safeguard measures in service trade and the limitations and problems of special and differential treatment for developing countries have been pointed out as major challenges related to the current WTO system. In addition to the challenges of the WTO system itself, the fact that the WTO does not adequately respond to the rapidly changing global trade environment is also a major problem of the current WTO system. The reason why the FTAs around the world in the 2000’s have rapidly expanded is the WTO multilateral system has failed to respond effectively to the new trading environment. Since the early 2000s, the Global Production Networks have rapidly spread out and the 'made in world' has become common due to such international division of production, and hence the set-out of new trading rules and further tariff concessions in accordance with such development has long been awaited. However, the progress of DDA has fallen far short of expectation due to the confrontation between developed and developing countries. As the global economic slowdown has been prolonged since the global financial crisis in 2008, countries around the world have strengthened their protectionist policies for their industries and jobs. Notwithstanding, the WTO failed to issue a proper prescription for them. WTO members have constantly bashed protectionism and stated the importance of strengthening multilateral trade system whenever there is opportunity, but this is only an empty declaration; non-tariff measures have steadily increased since the financial crisis and have not returned to pre-2008 levels.
   Furthermore, the trade liberalization that has been pursued so far has mainly focused on trade barriers, especially tariff concession. However, in terms of market access, behind-the-border or non-tariff measures and regulations such as customs procedures and domestic regulations has persistently remained. In this situation, the abolition of tariff barriers has rather created a favorable environment for large companies. Large companies have more human and physical capital than small and medium enterprises to deal with customs procedures and domestic regulations. As a result, SMEs have failed to enter the foreign markets due to complex customs procedures and regulations behind the border, while large companies have succeeded in entering those markets. Such imbalance results in the concentration of benefits from trade liberalization into large corporations. The same stark reality applies between capital and labor; since the share of labor income after trade liberalization is gradually decreasing, the issue of unequal distribution of benefits from trade liberalization between labor and capital has been pointed out in multilateral trade negotiations. Therefore, inclusiveness and sustainability of international trade have become main topics. The need for discussions about reform of the WTO system are invigorated among developed and developing economies alike.
   Nevertheless, the current WTO reform discussion is to be characterized as the multilateralization of the U.S-China bilateral trade conflict. According to the proposals submitted by developed countries regarding WTO reform, transparency and notification enhancements are on the table. A set of regulations is to be strengthened in order for the WTO member states to comply with the notification duty. In spite of how the reform of the WTO Appellate Body will be done is controversial, that reform will move in the direction of mitigating the complaints of the United States. In that regard, a certain extent of differentiation among developing states will be inevitable. It is obvious that such a discussion will face strong opposition from developing countries. However, as the economic heterogeneity across developing countries is widening up, it is difficult for developing economies to ignore the disparity in their levels of development and to assert the same obligation among all developing countries. In addition, plurilateral negotiations will also be actively pursued in parallel with the existing DDA. Since some issues that developing countries argue to keep on the DDA negotiation table will be there as they are now, the 'flexible multilateralism' referred to by the EU will also be at the center of the debate. Considering the current conflicts between developed and developing economies, it cannot be ruled out the possibility that the multilateral system could be divided into alliance among developed economies and a group of developing countries if the WTO reform initiative led by developed countries such as the United States is not reaching to their desired level due to the opposition of developing economies. In this case, the current WTO regime may demise indeed.
   Therefore, Korea needs to be strategically prepared for the reform of the WTO system. With regard to transparency enhancement and notification enhancement, obtaining information on industrial subsidies across member states is intended and according to them more stringent classification and international review of subsidies is expected to be set-out. Therefore, Korea should review whether the current supplementary policies are strictly in accordance with the WTO regulations and minimize the possibilities of countervailing duties from other WTO members in advance. Maintaining the status of developing countries has been the principal premise of the DDA agriculture negotiations of Korea. However, given that recent development of the discussion with regard to the differentiation of developing countries, keeping Korea as a developing country will not be an option any longer. Since the obligations between developing and developed countries is considerably different in the agricultural sector, the implementation of Korea's obligations as a developed country will not show a favorable impact on the agricultural sector for a while. Therefore, there is a need for thorough preparation of the agricultural sector for such changes. Since the discussions on reform of the WTO system will go through every detailed issues, it is necessary for Korea to actively participate in the discussions on the agenda of our interests, especially transparency and notification and differentiation of developing countries, and reflect our interests in those discussions as much as possible.
   Moreover, the direction of Korea's multilateral trade policy, taking into consideration of the WTO system reform and the changes in the global trade environment, should include strengthening the status of Korea in the WTO, promoting inclusive trade within the WTO system, multilateralization of bilateral and regional trade agreements, and embracing the sustainability issues in the multilateral trade agenda. In order to strengthen Korea's status within the WTO system, it is necessary to cultivate multinational trade experts and expand the dispatch to the WTO Secretariat. In addition, it is necessary to increase the contribution of Korea by actively participating in various projects managed by the WTO. It is also a good idea for Korea to lead the WTO ministerial meeting. At the same time, it is an effective way to substantially promote Korea's position in the multilateral trade stage with new proposals supported by developed and developing countries that can break through the deadlocked DDA.
   To pursue and lead inclusive trade, it is necessary for Korea to contribute to promoting the implementation of the trade facilitation agreement first. In particular, it is effective to provide customized consulting services to developing countries focusing on the e-Customs clearance system or ‘single window’ system that Korea has strengths with and developing countries are in need of. It is also important to develop a Korean GSP program for developing countries. For example, Korea opens up commodity markets developing countries desire and provide technical and financial support contents in those sectors so that encourage them to experience the benefits of trade liberalization. Along with these efforts, a customized bilateral solution system for SMEs as well as large companies to resolve the difficulties with regard to access to those markets should be pursued together.
   In order to multilateralize bilateral or regional trade agreements, a unified framework is needed to connect the FTAs together ​​that Korea has been promoting so far. In the case of tariffs, for instance, the tariff concession for all products in all FTAs could be uniformly set at the most liberalized schedule Korea has offered to any WTO members. In the case of services, a unified liberalization framework can be created as well with applying the MFN principle.
   Last but not least, in order to strengthen the sustainability of trade, we have to consider the resumption of Environmental Goods Agreement (EGA) negotiations, the harmonization of trade and environment, and the promotion of new rules for permitting environmental subsidies. Furthermore, we must now consider sustainability issues i.e. the implementation of the Paris Climate Accord in the multilateral trading system.